|
|
Newsletters
Archives
June 2005
Proposals would tax partnership interests transferred for services under restricted property rules 
Written by: Matt Capone, CPA
IRS has issued proposed regulations that would apply the restricted property rules of Code Sec. 83 to determine the tax consequences of a partnership's transfer of either a capital or profits interest in exchange for services.
The proposed regulations would adopt the following approach for taxing partnership interests transferred in exchange for services:
- A partnership capital or profits interest would be property under Code Sec. 83 , and the transfer of a partnership interest in connection with the performance of services would be subject to Code Sec. 83.
- A transferee would be treated as a partner for income tax purposes if a Code Sec. 83(b) election is made; if such an election is not made, then the holder of the partnership interest would not be treated as a partner until the interest becomes substantially vested.
- The timing and amount of the partnership's compensation deduction would be governed by Code Sec. 83.
- The amount includible by the transferee and deductible by the partnership generally would equal the fair market value of the transferred interest.
- Because partnership interests can be difficult to value, and to help partnerships maintain capital accounts properly, a partnership and its partners would be allowed to elect a safe harbor under which the fair market value of a partnership interest would be treated as equal to the liquidation value of the interest.
- A partnership transferring a partnership interest in exchange for services generally would recognize no gain or loss on the transfer.
- The service provider's capital account would be increased by the amount he takes into income as a result of receiving the interest, plus any amounts paid for it.
For more information on the above topic, please contact Matt Capone at Beason & Nalley, Inc. at 256-533-1720 or email at mcapone@beasonnalley.com. Insights
Auditing ASB Responds to FASB GAAP Hierarchy
The sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental enterprises that are presented in conformity with generally accepted accounting principles (GAAP) in the United States, are collectively referred to as "GAAP hierarchy." Historically, GAAP hierarchy has resided in auditing literature - American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles" in the Independent Auditor's Report. The Financial Accounting Standards Board (FASB) recently announced its view that GAAP hierarchy should reside in accounting literature because companies, not their auditors, are responsible for selecting accounting principles for financial statements that are prepared in accordance with GAAP. Accordingly, the FASB published an Exposure Draft, The Hierarchy of Generally Accepted Accounting Principles.
Though the FASB proposal makes no substantive changes to the GAAP hierarchy existing in SAS 69, the FASB may change the GAAP hierarchy in the future. Therefore, in response to the FASB's Exposure Draft, the AICPA Auditing Standards Board (ASB) published an Exposure Draft to amend SAS 69 so as to delete the GAAP hierarchy for nongovernmental entities. The proposed SAS clarifies that the FASB is responsible for identifying the sources of accounting principles and the framework for selecting such principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. It will have no impact on the GAAP hierarchy for state and local governments or for federal governmental entities.
The proposed Statement will be effective for audits of financial statements with fiscal years beginning after September 15, 2005 and is available for comment until June 27, 2005 at http://www.aicpa.org/download/exposure/SAS_69 _Amendment_April_ASB.pdf. For more information about the FASB Exposure Draft, see the related article in the May 11, 2005 edition of Insights.
Our Letter of Comment to the ASB
McGladrey & Pullen, LLP has submitted a letter of comment to the American Institute of Certified Public Accountants Auditing Standard Board (ASB) regarding the following:
- Proposed amendment to Statement on Auditing Standards No.1, AU Section 530, Dating of the Independent Auditor's Report;
- Proposed Statement on Auditing Standards, Audit Documentation;
- Proposed Statement on Auditing Standards, Defining Professional Requirements in Statements on Auditing Standards;
- Proposed Amendment to Statement on Auditing No. 95, Generally Accepted Auditing Standards ; and
- Proposed Statement of Standards for Attestation Engagements, Defining Professional Requirements in Statements on Standards for Attestation Engagements.
The letter is available on our website.
Public Sector Complying with GAGAS and PCAOB Standards
Certain companies, such as lending institutions that participate in federally sponsored loan programs, may be required to have an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB) and Government Auditing Standards (GAGAS). For such entities, auditors must meet the requirements of both sets of standards in conducting their work.
Although GAGAS may be used in conjunction with professional standards issued by other authoritative bodies, the use of different standard setters' frameworks for assessing control deficiencies could result in inconsistencies in reporting on internal control under GAGAS. To facilitate the reporting of internal control deficiencies identified during audits conducted under both PCAOB and GAGAS standards, the Government Accountability Office has provided the following guidance:
- Auditors may prepare the GAGAS report on internal control based on the definition of "material weakness" contained in PCAOB Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with An Audit of Financial Statements , rather than on the terms "reportable condition" and "material weakness" contained in the American Institute of Certified Public Accountants' (AICPA) Statements on Auditing Standards. This will provide a consistent basis of reporting material weaknesses between the GAGAS report on internal control and the auditor's opinion on management's assessment of the effectiveness of internal control over financial reporting required by PCAOB standards.
- Auditors who prepare the GAGAS report on internal control using the PCAOB's definition of "material weakness" should also include in their report any other "significant deficiencies," as defined in PCAOB Auditing Standard No. 2, that would have otherwise been considered to be a "reportable condition" if the definitions in AICPA standards had been used. Such reporting will satisfy GAGAS requirements.
- Control deficiencies that meet the definition of "significant deficiencies" in PCAOB Auditing Standard No. 2 but not reported in the GAGAS report on internal control should be included in the management letter required by GAGAS, along with any other control deficiencies noted unless clearly inconsequential.
- If auditors elect to prepare the GAGAS report on internal control on the basis of the definition of "material weakness" contained in PCAOB Auditing Standard No. 2 rather than the AICPA definitions of "material weakness" and "reportable condition," the GAGAS report on internal control should clearly state that PCAOB standards and definitions were used, describe the scope of work performed, and provide appropriate definitions of PCAOB terminology.
- Auditors are required to comply with all other relevant GAGAS requirements related to reporting deficiencies in internal control, including developing findings to the extent possible, providing recommendations for corrective action if findings are sufficiently developed, obtaining views of responsible officials, ensuring appropriate report distribution, etc.
The above guidance does not change the auditor's responsibilities under PCAOB standards.
SEC More Guidance on AS 2
Section 404 of the Sarbanes-Oxley Act (SOX 404) requires each issuer to include in its annual report a report by management on the company's internal control over financial reporting and requires the company's auditor to attest to management's assessment of the company's internal control over financial reporting. Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2 (AS 2), An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements , is the standard auditors must use to satisfy their responsibilities under SOX 404. However, after the initial year of implementing AS 2, issuers, auditors and investors have expressed concerns about the cost of compliance, both internal and external, associated with SOX 404.
To address these concerns, the PCAOB has published guidance focusing on the scope of the internal control audit and how much testing of a company's internal control over financial reporting is required. AS 2 is a lengthy and complex standard that contains key concepts related to an audit of internal control over financial reporting that are not well defined or explained. A series of PCAOB Staff questions and answers (Q&A) seeks to provide additional guidance and interpretation of key concepts embedded in AS 2. McGladrey & Pullen appreciates and welcomes the additional guidance that has been issued by the PCAOB Staff. In addition, a PCAOB Board policy statement expresses the Board's view that auditors should:
- Integrate the audit of internal control with the audit of the financial statements so that evidence gathered and tests conducted in the context of either audit contribute to completion of both audits;
- Exercise judgment to tailor audit plans to the risks facing individual audit clients, instead of using standardized checklists that may not reflect an allocation of audit work weighted toward high-risk areas and weighted against unnecessary audit focus in low-risk areas;
- Use a top-down approach that begins with company-level controls to identify for further testing only those accounts and processes that are relevant to internal control over financial reporting, and eliminate from further consideration those accounts that have only a remote likelihood of containing a material misstatement;
- Take advantage of the flexibility that AS 2 allows to use the work of others; and
- Directly and timely communicate with audit clients when those clients seek auditors' views on accounting or internal control issues before those clients make their own decisions on such issues, implement internal control processes under consideration, or finalize financial reports.
To complement the PCAOB's guidance, the SEC's Office of the Chief Accountant (OCA) has issued a Staff Statement on Management's Report on Internal Control Over Financial Reporting to provide its views on certain issues raised in the implementation of SOX 404, including evaluating internal control deficiencies, disclosures about material weaknesses, and information technology issues.
The above guidance on AS 2 is available in full as follows:
Our Letter of Comment to the PCAOB
McGladrey & Pullen, LLP has submitted a letter of comment to the Public Company Accounting Oversight Board (PCAOB) regarding the proposed auditing standard, Reporting on the Elimination of a Material Weakness. The letter is available on our Web site.
The proposed standard is available here.
Insights is a biweekly publication of McGladrey & Pullen, LLP and should not be construed as accounting, auditing, consulting, or legal advice on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your McGladrey & Pullen, LLP service provider concerning your situation and any specific questions you may have. You may call 1.888.214.1416 for a contact person in your area. Coffee Talk
Scott Butler attended the RSM McGladrey's Net Group meeting in Norfolk, VA.
Darryl Walker and Chad Braley taught a Fed Pubs course in Washington, D.C. May 18-19 on Government Contract Accounting Systems Compliance.
Darryl Walker taught the FAR Part 31 Cost Principles Course in Huntsville, AL on May 5th.
Gail Wall attended a Fed Pubs Course in Las Vegas, NV on Government Contract Accounting.
Gail Wall along with other members of the Huntsville Chamber of Commerce visited Washington, DC.
Welcome to Valeria Molton who joined Beason & Nalley in our Accounting Services Department.
Congratulations to Stephanie & John Kingsford on the birth of their daughter, Remy Catherine.
Congratulations to Amanda Langston on her marriage to Ryan Patton. Related Information:
BACK to Archives Also see:
Why Choose Us? | Industries | Contact Us
|
 |
___________
|
